We are aware that a number of consumer action groups are advising consumers to apply for default judgments, obtained against them by lenders for failure to make repayments, to be set aside on the basis that notice of assignment of the mortgage has not been served correctly. This is relevant where, for example, a lender has purchased a mortgage loan book and so was not the original party to the mortgage contract. If argued successfully this would mean that the assignee lender had no right to bring an action in the first place.

Law of Property Act 1925

Under section 136 of the Law Property Act 1925 (“LPA 1925”) notice of assignment must be given to the other party to a contract (i.e. the borrower) expressly in writing. There is no prescribed time limit for giving notice but the assignment is only legally valid when the borrower receives the notice.

Until proper notice is given, only an equitable assignment has taken place. An equitable assignment differs from a legal assignment in that where there is a legal assignment the assignee can bring an action (e.g. for recovery of a debt) in its own name against the borrower. On an equitable assignment the assignee would need to join the assignor as a party to the action before an action could be brought against the borrower. Alternatively, notice would have to be served in the correct manner before an action could be brought in the assignee’s name.

Section 136 LPA 1925 is silent as to how the notice should be served. The default statutory provision is found under section 196 LPA 1925. It provides that if notice is given to the other party by registered letter and is not returned undelivered, it will have been deemed to have been served. This means that whilst notice may be given expressly in writing, it will not be deemed served unless it has been sent by registered post.

Section 196 LPA 1925 refers to “registered letter”. The postal service “registered post” no longer exists. Instead, a notice should now be sent either as first class post with a certificate of posting (available through Royal Mail) or by recorded delivery; under the Recorded Delivery Act 1962 any notice which is deemed served by registered post will also be deemed served if sent by recorded delivery.

Section 196 (5) also states that its provisions extend to notices required to be served unless a contrary intention appears. In other words, if there is an express clause in the contract (which would include a lender’s mortgage conditions) that stipulates how any notices necessary under the contract are to be served, that will take precedence over the statutory provision in section 196.

Conclusion

If the mortgage conditions are silent as to how notice should be served, the provisions of the LPA 1925 will prevail. Express notice, in writing, must be given to the borrower and either delivery evidenced (by Affidavit of Service) or sent by registered letter, and not returned, in order to be validly served in accordance with section 196 LPA 1925. If this is not done, the borrower could argue that they did not receive the notice and that the assignee has no right to bring an action against the borrower in its sole name.

If, however, the mortgage conditions provide that notice is to be given by other means, e.g. by normal post, then so long as the method prescribed in the mortgage conditions has been followed, the notice will have been validly served.

A successful argument by a borrower that a notice of assignment has not been validly served does not give a total defence to that borrower and render the sums being claimed by the lender irrecoverable. The lender would, however, have to serve a notice of assignment on the borrower in using the correct method and then recommence litigation, thus incurring extra expense. Alternatively, the assignee will need to join the original lender into the action. Even if this is possible and the original lender consents, it will again incur extra expense

Mortgage lenders should ensure that their mortgage conditions include a clause which varies the provisions of Section 196 LPA 1925 and that they follow the prescribed method of service to ensure that borrowers cannot use this to delay and increase the costs of recovery litigation.

For further information please contact Ann Ebberson or the Partner with whom you usually deal